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31 January 2024 – Allianz Trade country risk atlas for South Africa 2024: B3 rating, sensitive risk for enterprises
Strengths:
- Despite challenges such as load shedding, poor infrastructure and modest employment rates, South Africa exhibited positive economic performance in 2023, with declining trends in insolvencies and reduced external vulnerabilities
- The budget deficit presented a positive surprise, with fiscal consolidation efforts, disciplined salary increases and increased tax collection contributing to stabilization of the government debt ratio at slightly over 70% of GDP
- South Africa also retains external resilience to shocks, with abundant international reserves covering around six months of imports, a flexible exchange rate and limited external debt in foreign currency
Weaknesses:
- The lack of reliable electricity supply poses a significant drag on growth, hindering businesses, industry and households from realizing their full potential
- Despite fiscal improvements, South Africa ranks poorly in public debt sustainability risk due to a considerable short-term absorption of revenues for debt repayment and elevated sovereign bond yields
- Disputes among political elites have led to violent uprisings and insurgencies, impacting the institutional framework, state legitimacy and the predictability of government action
Economic overview
Economic resilience evident with declining insolvencies and positive 2023 performance A modest GDP growth is in the air for South Africa this year (+1.4%). After an expected +0.7% in 2023, in line with our forecasts, output in the energy-intensive mining sector and services remain supportive, while social unrest and violent events are likely to intensify in the electoral period.
The need to increase social spending before the general election and idiosyncrasies among public entities pose risks to the outlook. Inflation remains under control since the peak of 8% in early 2023 and is likely to return to a 4% average in 2024, with the central bank taking a dovish approach in Q2. Economic resilience remains a feature of South Africa, as evidenced by a declining trend in insolvencies and a positive economic performance in 2023 despite business interruptions, increased inequality caused by load shedding, poor infrastructure and a modest employment rate, which remains slightly above 40%. External vulnerabilities have reduced, with foreign debt to GDP now at less than 40%, down from 53% and 56% in 2019 and 2020, respectively.
Electricity generation poses the heaviest drag on growth, with the national utility being able to work at only half of its nominal capacity. This lack of reliable electricity supply hinders businesses, industry and households from realizing their potential. While labour unions are likely to mobilize strikes in opposition to loosening local content rules for new generation capacity, it is improbable that sufficient capacity will materialize in the next 12 months.
High interest on debt, but the budget deficit remains moderated
Due to a considerable short-term absorption of revenues to repay interest on debt and an increase in sovereign bond yields, South Africa ranks in the worst quintile in our public debt sustainability risk assessment as of end-2023. The primary balance in 2024 is expected to remain within -1% of GDP (-0.6%), with personal income tax (PIT), corporate income tax, local and import value-added tax (VAT), as well as import customs duties as primary contributors to revenue growth. Salary increases and bonuses led to larger PIT inflows and recent inflation bolstered VAT revenue streams. However, interest expenditure on debt will account for 4.5–5% of GDP.
Although the level of government debt is still elevated, the ratio is expected to stabilise at a little more than 70% of GDP, including government guarantees on stateowned enterprises’ (SOEs) debt. Interest payments are part of the price of the favorable debt structure, which is primarily denominated in local currency and has a lengthy amortisation profile on average (12 years).
International reserves remain abundant (USD61bn in September, around 15% of GDP) and cover for around 6 months of imports, double the level commonly seen as critical for emerging markets. Fiscal consolidation will continue, with increased tax collection and disciplined salary increases providing some flexibility to meet mounting social demands and moderately supporting SOEs in case of need.
Although the country’s dependence on foreign capital makes it susceptible to sudden stops due to international relations, such as the alleged sale of weapons to Russia or the recent stance against Israel for the treatment of Palestinians, the external balance has so far manufacturing is likely to resume close to pre-pandemic levels thanks to an increased availability of electricity, some electoral spending, tourist inflows and resilient internal demand. Overseas visitors increased by 47% year on year to 1.9mn between January and November 2023, while African visitors increased by 53% to 5.8mn.
Private consumption and been resilient to shocks. Buffers include a flexible exchange rate, limited external debt in foreign currency and substantial external assets that make South Africa the largest net investor on the continent, with a net position of USD59bn. In 2023, foreign direct investment (FDI) inflows fell to USD4.3bn following an impressive performance in 2022, but FDI outflows increased (as residents returned foreign assets), bringing net FDI to USD6.4bn.
South Africa’s slow-growing export markets and volatile export markets contribute to its high import propensity of 28% of GDP, affecting its external accounts negatively and putting pressure on the rand. The rand’s value is influenced by price discrepancies, commodity price fluctuations, the current account deficit and the need to accumulate foreign reserves. Upside pressures include increased foreign investor interest in developing economies, a conservative central bank stance and upwardly moving commodity prices, which should buffer its longer-term depreciation trend.
Election test for a society that remains divisive
The country is less competitive than its peers due to its distance from global markets, high labor costs and an extractive economic structure. Increased strike and unrest risks are a result of inter-union conflict, particularly in the precious metal mining industry, where there is an ongoing struggle for power.
The state’s limited ability to conduct effective policy is compounded by demographic pressures, competition between groups and unions in countering government action, inequality heightened by the crises of recent years and, more recently, inflation. Worsening disputes among political elites and the resulting increase in violent uprisings and insurgencies further weigh on state legitimacy, the capability of the ruling ANC party to defuse dissent and the predictability and effectiveness of government action.
The leading party clearly lost positions in the local elections held in November 2022, when support for the ANC crucially fell below the 50% benchmark. For now, it is difficult to see a strong contender and even if the party loses the absolute majority in the upcoming election, it is likely to remain the largest in parliament, way ahead of its closest rival and able to continue to govern with the support of a junior coalition partner. Source: Allianz Trade Country Risk Atlas – report